Below I have provided a sample answer to a 25 mark practice question. This is based on my experience as an economics tutor. Hopefully this may help guide some students.
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Question
Consider the following 25 mark practice question:
With reference to examples, evaluate the effects of a tariff (25 marks).
I have kept the question relatively simple, as the focus here is on exam technique.
Possible Answer
A tariff is a tax on imports and is a protectionist measure. In recent years there has been an increase in the degree of protectionism around the world. For example the US imposing tariffs on Chinese steel and tariff retaliation from China.
KAA 1
A tariff will support domestic producers. Consider the example of steel tariffs of 25% that US President Donald Trump put in place on Chinese steel. In the diagram below, a tariff will shift the world supply upwards from world supply to world supply + tariff. So the world price increases from pw to pw+tariff. This reduces the quantity of imports from (q4-q1) to (q3-q2). The tariff increases domestic production from q1 to q2, increasing producer surplus by area (AB pw pw+tariff). This will mean higher profits for the US steel firms, leading to higher investment and employment.
This could also mean local multiplier effects as workers are now richer, owing to possibly higher employment and pay. So workers spend that money in local shops, increasing consumption and living standards in the area. The multiplier effect is when an increase in a component of aggregate demand leads to a larger than proportionate increase in real GDP.
The tariff also raises government revenue. Higher revenue could go towards reducing the large budget deficit that the US Government has because of pandemic spending, hence reducing future debt interest payments. Alternatively government revenue could further support steel firms through export subsidies, making them even more competitive relative to foreign importers and further increasing domestic production, employment and wages in steel.
Evaluation 1
However a tariff can cause a loss in consumer surplus by area pw pw+tariff C D. This is because of higher prices and reduced quantity sold to domestic consumers. Also the units between q1 and q2 are now being produced by inefficient domestic firms, when foreign producers could produce the steel more cheaply. Overall there will be welfare losses of the two shaded green triangles.
Tariffs can also create a possibility of retaliation. In the case of the US tariffs on Chinese steel, China retaliated with its own tariffs, for example on frozen pork. Retaliatory tariffs would increase the costs for US producers of frozen pork, rendering their product less competitive in US markets. This could lead to decreased quantity exported and producer surplus for US frozen pork producers. The retaliation is likely to undermine any benefits from the original tariff, rendering the tariff a less effective policy. As it increases prices, it is also likely to reduce US consumer surplus. The original tariff and the retaliatory tariff both cause a welfare loss for the US economy in this case.
KAA 2
Tariffs can support infant industries. Consider the example of the micro-computer industry in Brazil in the 1980s. This was a new industry for Brazil. Under free trade, Brazilian manufacturers would be undercut by larger international competitors and so Brazilian firms would not be able to grow. With a tariff in place, Brazilian manufacturers face reduced competition from abroad, allowing these firms to grow and achieve economies of scale, meaning lower long-run average costs as output increases.
For example purchasing economies of scale, meaning firms can bulk-buy inputs at discounted prices. Reducing firm costs would shift the SRAS right from SRAS to SRAS1, leading to higher equilibrium real GDP (Y to Y1) and reduce the price level in the economy from PL to PL1.
This leads to an extension along the aggregate demand curve. A lower price level boosts export competitiveness, increasing export demand, likely raising the value of exports (if export demand is price-elastic). So aggregate demand rises.
This would also mean higher employment in the infant industry and wider economy. The tariffs could be used as a short-run measure – once the infant industry has reduced its costs sufficiently through economies of scale, it can compete with the established international firms on cost and hence price. This may allow greater exports out of Brazil in the future from the infant industry.
Evaluation 2
However tariffs may increase costs for firms relying on steel as an input. Steel is important as an input for cars and planes. The US has major producers of cars such as Ford as well as planes with companies such as Boeing. Increasing costs of steel will increase business costs, shifting the SRAS to the left from SRAS to SRAS_1, leading to a fall in real GDP from Y to Y_1 and an increase in price level from PL to PL_1.
These firms would then see lower profits, investment and employment and if costs get too high, plants could close in the US or even move abroad to circumvent the tariffs. So while tariffs may benefit some industries in the US, they can harm other industries within the US too.
Conclusion
Overall a tariff is likely harmful due to the net welfare loss. This is also because of the increased costs for key US industries using steel as an input.
However the effectiveness of no tariffs depends on other government policies to support those who lose out from free trade.
Even if free trade may make some better off (consumers) and some worse off (steel workers), the US Government could find a way to tax those who benefit and give welfare payments to those worse off or to retrain them.
The US Trade Adjustment Assistance welfare program does this to some degree. This program helps workers who may have lost jobs because of international competition from imports. But the TAA program may not be sufficient to support all workers affected by free trade, including those affected indirectly. The key situation in which a temporary tariff may be desirable occurs when there are infant industries.
Commentary
An introduction can be very short – defining key terms. I also used it here to set some context but the most important thing is to get on with writing your key point.
For more guidance on exam technique for Edexcel A, check out the blue button here:
The structure I have used involves one KAA (knowledge, application and analysis) paragraph, one evaluation paragraph, then a second KAA paragraph, followed by a second evaluation paragraph then a conclusion. Some schools recommend 3 KAA paragraphs and 3 evaluation paragraphs before a conclusion – this is fine, provided the points are shorter than the ones used above.
The analysis paragraphs use multiple chains of analysis and examples from the real world. Where relevant they also bring in definitions. The evaluation paragraphs explain points fully and use context as a way of supporting the answer. The conclusion gives a judgement, justifies the decision, and explains one key factor the decision may depend on (while referring to context).
This essay would likely achieve the top bands for analysis and evaluation for Edexcel. For more information on the criteria used, see the link to the Edexcel Economics A page here.
This has used the “however” style evaluation. But you could also change this to the “it depends on” style evaluation very easily if you or your teacher prefers this approach.
This is just one way of answering the question and does not represent my view. Indeed you argue that tariffs are effective. For example because of the effects on domestic producers, inequality, negative externalities and so on.
More Reading
To practise using some practice papers written in the style of Edexcel Economics A-level A, click the blue button below:
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